GDP growth and formal employment: Whose GDP is it anyway?

Source: This post is based on the article “Whose GDP is it anyway?” published in The Hindu on 27th July 2022.

Syllabus: GS 3 – Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Relevance: About GDP growth and formal employment.

News: The Government will release the first quarter’s Gross Domestic Product (GDP) growth numbers within a few days. The debate on GDP growth and formal employment generation might once again erupt.

What is the relation between GDP growth and formal employment in India?

Based on the Reserve Bank of India (RBI) data (Employment in public and organised private sectors’),

a) It is calculated that between 1980 and 1990, every one percentage point of GDP growth (nominal) generated roughly two lakh new jobs in the formal sector.

b) In the subsequent decade from 1990 to 2000, every one percentage point of GDP growth yielded roughly one lakh new formal sector jobs, half of the previous decade.

c) In the next decade between 2000 and 2010, one percentage point of GDP growth generated only 52,000 new jobs.

d) The RBI stopped publishing this data from 2011-12.

This shows that the correlation between formal sector jobs and GDP growth has weakened considerably.

What is the relation between GDP growth and formal employment around the world?

The above phenomenon is not unique to India. For instance, a) The U.S. today produces fewer new jobs for every percentage point of GDP growth than it did in the 1990s. b) China produces one-third the number of new jobs today than it did in the 1990s for every percentage of its GDP growth.

What is the significance of findings on GDP growth and formal employment?

The single most important demand of people in India is jobs, specifically, a high-quality formal sector job that ensures the dignity of work, good income and job security.

The GDP growth matters to the average Indian only if it can generate good quality jobs and incomes for them. But the findings on GDP growth and formal employment shows,

Firstly, the GDP is a simple metric that is a good indicator of economic progress which can be compared across nations. So, focussing on GDP growth at all costs can be counter-productive.

For instance, Sri Lanka’s mass uprising and people’s revolution can partly be explained due to the structural break between headline GDP growth and economic prosperity for the people.

Secondly, there is a condition that the World Bank and International Monetary Fund projected ‘fastest’ growing economies are unable to provide prosperity and social mobility for their people.

This may partly be reflected by the voters’ sense of deception over economic gains. This resulted in Electoral outcomes in favour of extreme positions in mature democracies such as the U.S., the U.K., and Germany.

Thirdly, a statistical aphorism ‘Everything that counts cannot be counted and everything that can be counted does not count’ summarises the GDP growth paradox faced by many democracies.

What is the recommendation of ‘commission on the Measurement of Economic Performance and Social Progress’?

Formed in: 2008, by the then President of France/

Commission members: Nobel Laureate economists Joseph Stiglitz, Amartya Sen and others.

Aim: To develop a more comprehensive measurement framework of economic and social performance as an alternative to the excessive reliance on GDP.

Major recommendation: expand the dashboard of multiple indicators unique for each country.

Hence, India should overhaul its economic performance measurement framework to reflect what truly matters to the common person.